Letter to BS: Will Project Sashakt help clear the Indian banking mess?

Sometime in the year 2000/2001, a corporate debt restructuring (CDR) scheme was introduced to resolve the non-performing assets (NPA) problem of the Indian banking system. The scheme worked well but after it started becoming ineffective, came SDR and S4A, which could not be of much help.

In my view three mechanisms are working towards NPA resolution — banks’ own efforts to resolve, the Insolvency and Bankruptcy Code (IBC) process, and the sale to asset reconstruction companies (ARC). The IBC process is certainly working effectively as it has been able to find takers for large stressed assets in a transparent way. This needs to be strengthened by plugging loopholes if any. The sale of NPAs to ARCs is also working effectively. When these systems are working well, there is no need to launch a new scheme and complicate the process.

The new three-pronged approach (Sashakt) may adversely affect the above processes. The proposed intercreditor agreements appear similar to the joint lenders' forum (JLF) mechanism. The creation of asset management company/alternative investment fund is similar to ARCs. Having a separate vertical to resolve NPAs is similar to a separate department/cell which most of the banks already have. This new approach may add to the workload of banks.